Panel suggests revenue model for PFRDA

New Delhi: The pensions business may well become the first where the regulator earns a fee from fund managers that is a percentage of the assets managed by the latter.

This is one of the recommendations of a committee headed by G.N. Bajpai, former chairman of stock market regulator Securities and Exchange Board of India (Sebi), that may come into effect.

The committee has suggested a revenue model for the Pension Fund Regulatory and Development Authority (PFRDA) that is based on charging a percentage of the assets under management from fund managers.

The committee was set up to resurrect the national pension system (NPS) that has since May 2009 found only 50,000 takers amidst a workforce of over 400 million people in the country not covered by any pension plans.

The committee has qualified its recommendation by saying fund managers may be asked to make the payment “only when they reach critical mass in their assets under management”. It said the fee could be 1 basis point, or one-hundredth of a percentage point, of the assets under management (AUM).

Other regulators earn a flat fee based on pre-determined slabs. “We have to pay to the Sebi a flat fee depending upon the asset under management slabs,” said Naval Bir Kumar, managing director, IDFC Asset Management Co. Ltd.

The problem, according to an expert associated with pension reforms in India, is that pension funds charge only 0.0009% as their management charge. “How will the fund managers pay a fee of one basis point when they are recovering much lesser as FMC (fund management charge)? This would mean that costs will get passed on to the customer or will get included next year when fund managers bid again to manage the pension funds,” said D. Swarup, chairman, Financial Planning Standards Board India and former chairman of PFRDA.

The Bajpai committee is silent on both the logic of calculating the charge as well as its definition of critical mass, although it does speak of a dynamic element to the fee structure, which ensures that an increase in the assets under management automatically results in a lower fee.

The committee has suggested this increase in charge be accompanied by an increase in the number of pension funds allowed. Currently, there are only six fund managers in the unorganized labour sector. It has also recommended that fund managers be allowed to sell pension schemes through intermediaries.

The committee has also recommended that PFRDA should work jointly with the the insurance regulator, Insurance Regulatory and Development Authority, in order to develop the annuity market.

The report has also recommended easing the entry barrier for investors by bringing the entry limit down from Rs 6,000 to Rs 1,000. It also suggests introducing a health savings account in NPS to provide old-age protection to investors.

The report currently is up for comments and scrutiny by stakeholders and the public.